Formula
ROA (Return on Assets) = Net Income ÷ Total Assets ROE (Return on Equity) = Net Income ÷ Shareholders' Equity ROIC (Return on Invested Capital) = Net Operating Profit After Tax ÷ (Debt + Equity)
The Short Version
These three ratios each measure profit against a different base, and together they reveal how efficiently a company turns resources into profit.
Explain It Like I'm 10
Imagine three different measures of how good you are at growing a garden. ROA asks: 'given ALL the soil, water, and tools you have (regardless of who paid for them), how much did you grow?' ROE asks: 'given only the tools and soil YOU personally paid for (not what you borrowed), how much did you grow?' ROIC asks: 'counting BOTH what you personally paid for and what you borrowed to get started, how much did you grow, after accounting for taxes?' Each answers a slightly different version of the same core question: how efficiently are resources being turned into results?
Step-by-Step Example
- 1 Net Income: $30,000,000. Total Assets: $300,000,000 → ROA = $30M ÷ $300M = 10%.
- 2 Shareholders' Equity: $150,000,000 → ROE = $30M ÷ $150M = 20%.
- 3 Notice ROE (20%) is double ROA (10%) here — that gap comes from the company using debt (the other $150M of assets) to boost returns to equity holders.
- 4 Net Operating Profit After Tax: $35,000,000. Total invested capital (debt + equity): $250,000,000 → ROIC = $35M ÷ $250M = 14%.
- 5 ROIC strips out the effect of HOW the company is financed, making it one of the cleanest ways to judge the true quality of the underlying business.
Quick Recap
- ✓ ROA shows how well the company uses everything it owns (regardless of how it was financed) to generate profit.
- ✓ ROE shows the return specifically to shareholders, and can be inflated by high debt (see DuPont analysis below).
- ✓ ROIC strips out the effect of the capital structure entirely, making it one of the cleanest measures of true business quality — many long-term investors treat it as a favorite metric.